My Capstone project from my MBA class in 2008. This was done before Google acquired admob. One our recommendations was invest more in mobile ads platform. :)

1. MGMT 619, Winter 2008 Capstone Project
Team Android

2. Team Android
Swami Gurumoorthy, Mihir Sambhus, Vaidya Venugopal, Venkataraman Sankar, Jesse Green
ii

3. Table of Contents
I. Wall Street Journal Article and Executive Summary.........................................................vii
Wall Street Journal Article .....................................................................................................................vii
Executive Summary.................................................................................................................................1
II. External Analysis...................................................................................................................2
Industry Definitions.................................................................................................................................2
Mobile Advertising Industry.................................................................................................................2
Mobile Operating System Industry .....................................................................................................2
Six Forces Analysis – Mobile Advertising.................................................................................................3
Level 1 Analysis....................................................................................................................................3
Level 2 Analysis....................................................................................................................................3
Level 3 Analysis....................................................................................................................................5
Six Forces Analysis – Mobile Device Operating System...........................................................................6
Level 1 Analysis....................................................................................................................................6
Level 2 Analysis....................................................................................................................................6
Level 3 Analysis....................................................................................................................................8
Macro Environmental Forces Analysis.....................................................................................................9
Global Trends.......................................................................................................................................9
Social Trends........................................................................................................................................9
Technological Trends.........................................................................................................................10
Governmental/Political Trends..........................................................................................................10
Ethical Concerns................................................................................................................................10
Macroeconomic Trends.....................................................................................................................11
Demographic Trends ........................................................................................................................11
Competitor Analysis...............................................................................................................................11
iii

4. Mobile Advertising Industry Competitor Analysis..............................................................................11
Mobile OS Industry Competitor Analysis...........................................................................................19
Intra-Industry Analysis...........................................................................................................................23
Intra-Industry Analysis – Mobile Advertising.....................................................................................23
Intra-Industry Analysis – Mobile Operating Systems.........................................................................27
Threats and Opportunities Analysis.......................................................................................................30
Threats and Opportunities – Mobile Advertising...............................................................................30
Threats and Opportunities – Mobile Operating Systems...................................................................32
Summary of External Analysis................................................................................................................32
III. Internal Analysis.................................................................................................................34
Business Definition / Mission.................................................................................................................34
Company Philosophy.........................................................................................................................34
Organizational Structure and Controls..................................................................................................35
Strategic Position Definition..................................................................................................................36
Corporate Level Strategic Position.....................................................................................................36
Business Level Strategic Position.......................................................................................................40
Resources and Capabilities................................................................................................................41
Financial Analysis...............................................................................................................................47
IV. Strategy Effectiveness Analysis ......................................................................................52
Google’s Strategic Move........................................................................................................................52
Effect of Strategic Move on Industry Conditions...................................................................................53
Mobile OS Market..............................................................................................................................53
Mobile Advertising Market................................................................................................................54
Resources Needed for Strategy Implementation...................................................................................55
R&D Resources..................................................................................................................................55
Operational Resources.......................................................................................................................56
iv

5. Marketing & Sales..............................................................................................................................56
Financial Resources............................................................................................................................56
Overall Effectiveness of Strategy ..........................................................................................................56
V. Recommendations..............................................................................................................57
Short Term Recommendations..............................................................................................................57
Evangelize Android Platform..............................................................................................................57
Ride the Mobile TV wave to expand Mobile Advertising...................................................................58
Make AdWords platform attractive by bundling online and mobile offering....................................58
Longer Term Recommendations............................................................................................................59
Champion the cause to accelerate adoption of 4G Mobile Broadband.............................................59
Innovate Business model to embrace user generated Ad content ...................................................59
Use Targeting and analytics to raise the bar in Mobile Ad platform .................................................60
Strategy Implementation.......................................................................................................................60
Short term Strategy Implementation – Evangelize Android Platform ...............................................60
Changes required to implement recommendation............................................................................61
Long Term Strategy Implementation - Accelerate adoption of 4G Mobile Broadband .....................62
Changes Required to Implement Recommendation..........................................................................62
Corporate Social Responsibility/Ethical Decision Making......................................................................63
VI. Conclusions........................................................................................................................64
Exhibit 1. Mobile Advertisements Industry EcoSystem.....................................................65
Exhibit 2. Dual Sided Advertising Market..............................................................................65
Exhibit 3. Mobile OS/Platform Industry EcoSystem...........................................................66
Exhibit 4. 6 forces Analysis, Mobile Advertising – Level 1& 2 .........................................67
Exhibit 5. 6 forces Analysis, Mobile Advertising – Level 3................................................72
Exhibit 6. 6 forces Analysis, Mobile OS – Level 1 & 2.........................................................73
Exhibit 7. 6 forces Analysis, Mobile OS – Level 3..............................................................78
Exhibit 8. Mobile Advertising market share in 2011..............................................................78
Exhibit 9. Mobile Data Usage..................................................................................................79
Exhibit 10. Average Mobile App. Price- US consumers........................................................79
Exhibit 11. Total Wireless Users.............................................................................................80
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6. Exhibit 12. Penetration of Wireless Users in different age groups......................................80
Exhibit 13. Resources /Capabilities of competitors - Online Advertising...........................81
Exhibit 14. Value /Price/Cost Analysis – Mobile Advertising...............................................82
Exhibit 15. Resources /Capabilities of Competitors - Mobile OS.........................................83
Exhibit 16. US Mobile Advertising Spending Projections in 2000.......................................83
Exhibit 17. Mobile Advertising Industry Timeline..................................................................84
Exhibit 18. Google Organization Structure............................................................................85
Exhibit 19. BCG Matrix............................................................................................................86
Exhibit 20. Google’s Value Chain ..........................................................................................87
Exhibit 21. Value /Price/Cost Analysis with Mobile...............................................................88
Exhibit 22. VRIO Analysis for Google....................................................................................89
Exhibit 23. Product Portfolio Analysis...................................................................................90
Exhibit 24. Mobile Ad Product Life Cycle...............................................................................91
Exhibit 25. Valuation Assumptions........................................................................................92
Exhibit 26. Current Valuation..................................................................................................93
Exhibit 27. Scenario Analysis Valuations..............................................................................93
Exhibit 28. Methods of Value Creation...................................................................................96
Exhibit 29. Recommendation Timeline..................................................................................96
Financial Exhibit A. Google Inc. 7 Year Statement of Income..............................................97
Financial Exhibit B. Google Inc. 5 Year Balance Sheet........................................................98
Financial Exhibit C. Google Inc. 5 Year Statement of Cash Flows.......................................99
Financial Exhibit D. Comparative Financial Analysis.........................................................100
Financial Exhibit E. Graphical Comparative Ratios...........................................................102
Financial Exhibit F. Google Inc. Income Statement Trends..............................................105
Financial Exhibit G. Google Inc. Balance Sheet Trends....................................................106
Financial Exhibit H. Stock Performance Jan 2005 – Feb 2007...........................................106
VII. Bibliography....................................................................................................................107
vi

7. I. Wall Street Journal Article and Executive Summary
Wall Street Journal Article
Google, Bidding For Phone Ads, Lures Partners1
By KEVIN J. DELANEY and AMOL SHARMA
November 6, 2007
Google Inc. is trying to shake up the wireless industry by helping to create cheaper phones that
can access advanced Internet services -- and carry its lucrative advertising. Now that the
Internet giant has cemented an alliance with 33 partners, the question is whether they will follow
through on its attempt to change the rules of the game.
After months of anticipation, a group including Google and a number of mobile-handset makers,
cellular carriers and other technology companies plans to make new software available -- free of
charge -- to power mobile phones that will start hitting the market in the second half of 2008.
The move paves the way for mass-market cellphones that will bring consumers' experience on
the mobile Web closer to that of personal computers. And Google is betting that its ad revenue
will surge as a result.
Yesterday's announcement could prove a short-term disappointment for consumers who were
eager for more details -- and photos -- of what some have termed the "Google Phone" or the
"Gphone." Google didn't announce the creation of any single Google-powered device or show
what one might look like.
Still, the move shows Google's latest tack for breaking down barriers to expanding its
advertising and services businesses. It also highlights Google's belief that its large ad business
can benefit if it broadens Web usage -- in this case on mobile phones.
Even if "Android," as the platform is called, falls short, it highlights an important shift: Carriers
and handset makers are seriously considering changes to the economics of how phones are
sold to consumers, as well as offering more open access to the Web and third-party
applications.
The Android platform announced yesterday by the Google-led Open Handset Alliance includes
several layers of software for phones, among them an operating system, a user interface and
applications such as advanced Web-browsing software. Among the handset makers that have
signed on to the initiative are Taiwan's HTC Corp., Samsung Electronics Co. and Motorola Inc.
Operator partners include Deutsche Telekom AG's T-Mobile, Sprint Nextel Corp. and Japan's
NTT DoCoMo Inc.
Android is a bid to change how the wireless industry operates. Carriers traditionally have
decided what applications most consumers see on their cellphones, setting rules and
vii

8. negotiating fees for software developers to gain access. Google has struggled at times in recent
years to get its products -- including Google Maps, Gmail email and its search engine -- onto
mobile phones in a way that's easy for people to use. With Android, software makers can
theoretically write applications that run on any user's phone -- and consumers can freely browse
the Web.
But until new handsets based on Android come to market, it won't be clear how far operators
have gone to satisfy Google's desire for open mobile software. Some carriers have said they
still want to make sure Android doesn't allow sensitive user information to fall into the hands of
rogue third-party developers, leading to invasions of privacy and security risks. Those issues
partly explain why large U.S. operators such as AT&T Inc. and Verizon Wireless, a joint venture
of Verizon Communications Inc. and Vodafone Group PLC, have yet to sign on to Google's
initiative.
Verizon Wireless is still weighing whether to join, a person familiar with the
company's thinking said. AT&T, in part because it exclusively carries Apple
Inc.'s iPhone in the U.S., is restricted from partnering with Google, people
familiar with the matter say. One issue for the carriers is Google's interest
in bidding for wireless spectrum in a coming auction run by the Federal
Communications Commission, people familiar with the matter say. If
Google, which has said it will likely bid, buys spectrum and partners with
another company to build a new mobile network, it would become a direct
competitor to the operators.
The Google software initiative arrives in a field already crowded with
cellphone software platforms, including ones from Microsoft Corp. and
Palm Inc.
Companies that aren't part of Google's alliance question whether Android represents a major
breakthrough. Nokia Corp., the world's largest handset manufacturer with more than one billion
current users, said it has already embraced an open approach with its high-end cellphones,
which use the Symbian operating system and have a large community of application
developers. "It's great to see others following the trail we've been blazing," said Bill Plummer, a
top Nokia executive in North America.
Tech consortia for decades have been notorious for failing to live up to their promise. Google
Director of Mobile Platforms Andy Rubin acknowledged the troubled history of previous
consortia, but said that Android was different because "we're actually releasing in one week this
software."
Google executives were coy about any eventual plans for Google-branded phones. "If you were
to build a Gphone you could build it out of this platform," Chief Executive Eric Schmidt told
journalists during a conference call. But he said he hoped there would be thousands of mobile
phones based on the Android platform. Google has used prototypes of Android-powered
phones internally -- including one code-named "Dream" -- and says that the software will run on
most phone designs, including touchscreen devices or phones with slide-out keypads.
viii

9. The Google-led alliance plans to release the Android platform for free use by carriers and
handset makers; it plans to provide software developers with an early version next week. The
prospect of richer cellphone features and lower-cost phones has enticed several carriers to sign
on. T-Mobile USA, which expects to have a Google-powered phone in the market by the second
half of 2008, wants to develop new social-networking applications, initially on its own but
ultimately with the help of independent developers. Cole Brodman, chief development officer of
T-Mobile, says Android is a breakthrough because it gives software developers access to
information they didn't have before, including a user's location, communications history, contact
list and "presence," a signal of whether someone's phone is on or off.
Sprint hasn't agreed to
carry a Google-powered
phone yet, but signed
on to the Android
alliance while it
continues talks. John
Garcia, the carrier's
senior vice president of
product development,
said using Android in
phones would make it
easier to get a variety of
mobile applications to
consumers. Mr. Garcia
said mobile-game
makers routinely have
to test their applications on an array of Sprint phones, writing specific programming code for
each one. That could become a thing of the past if an open platform becomes widespread.
Carriers will be able to customize the "open source" Android software as they see fit. They can
include a package of Google's home-grown mobile applications -- such as its search engine and
email -- or just use the open Android platform. The details would be decided in conjunction with
Google and the handset partner.
Google won't make money on Android itself, but the company believes it will create new
opportunities for Google to sell ads on mobile phones, something executives have characterized
as the company's biggest business opportunity. Google is betting that easier access to the
Internet from mobile phones will lead people to use its services more, as has been the case with
Web access on the personal computer. Google's Mr. Rubin said ads will appear on the phones
as they normally do when a user surfs the Web. The company may also sell ads for some
developers of applications that run on the phones. (The name of the new platform stems from
Google's 2005 purchase of Android Inc., a Silicon Valley startup co-founded by Mr. Rubin.)
Google said it would likely share revenue from ads with wireless carriers; the carriers then could
reduce the cost of handsets or wireless fees for consumers. Google also could make money in
ix

10. other ways, possibly by getting a share of monthly revenue from carriers or selling a rate plan
for a package of applications.
Google is counting on the many developers who build applications for PCs and the Web to start
making products for the phone. Google said the Android platform will make it easy for
developers to write applications that meld different data sources, such as a service that shows
users where their friends are at any given moment on a map. For U.S. consumers, Android
could speed the arrival of advanced applications already available abroad, such as multiplayer
gaming.
Google's strategy of cooperating with multiple handset-maker and operator partners to develop
perhaps thousands of different phone models differs starkly from that of Apple, which developed
a single iconic mobile device -- the iPhone -- that consumers now associate with its brand.
x

11. Executive Summary
Google is the market leader in the online search business with 59% market share and
has built a core competency in search. Google monetizes traffic to its ubiquitous search
engine and other applications such as Google maps, Gmail, using its ads business.
Google has been able to successfully create markets with its disruptive business
models.
Given the enormous growth potential, Google has been pursuing ways to expand its
market presence in the mobile industry. On November 6, 2007, Google announced an
alliance with 33 partners to develop a new free OS and software platform for a variety of
mobile devices code named ‘Android’. Google also decided to bid on the C-band of the
700 MHz wireless spectrum at the FCC auction, a move that makes the wireless
spectrum open and reduces Wireless Service Provider control.
One challenge that Google faces is that the growth promised by mobile advertising in
2000 hasn’t yet been realized as mobile data growth has been slow because of a
variety of factors. Google has to figure out a way to collaborate with the operators. As
mobile data usage becomes more prevalent, competitors are shaping up. Microsoft’s
recent bid to acquire Yahoo poses a major threat as the combined entity will be able to
compete better against Google. Mobile plays a big role in the synergies of the two
companies. Google needs to diversify its business to reduce its dependence on internet
search and move towards a dominant constrained corporate strategy.
Android is likely to be an important enabler for mobile data penetration and hence we
recommend Google to aggressively pursue Android evangelization. Google needs to
push Android penetration fast by partnering with mobile handset manufacturers to get
Android on the phones and evangelize Android in the application developer community.
In the short term, Google should focus on pushing ads in local search and mobile TV as
these are likely to form the killer applications on the mobile phones. Google should look
at mobile as a different business model than internet and provide better targeting and
profiling features with its mobile advertisement platform. Longer term, Google should
1

12. pursue its efforts to accelerate adoption of broadband mobile with the help of its
partners to grow the mobile ads market even faster.
II. External Analysis
Although Google’s strategic move involves multiple industries, the objective Google is
trying to achieve is to make information easily accessible subsidizing that via
advertisements. We have focused on the mobile advertising as the primary industry and
mobile device operating systems as an enabler industry. In the document, we have
analyzed the industries as appropriate in the relevant sections.
Industry Definitions
Mobile Advertising Industry
The industry can be broadly split into the advertising sector, technology sector, content
sector and the telecommunications sector. The industry ecosystem is shown in Exhibit
1. Mobile advertising is a two sided market with advertisers and content publishers
forming the two sides2. The advertisers pay the mobile ad networks to carry the
advertisement inventory whereas the content providers generally get free subsidized
access to the inventory (Exhibit 2). The mobile ad servers allow advertisers to target the
advertisements to the appropriate demographics. The advertising agencies provide
customized services to the advertisers to manage their campaigns. The mobile
consumers watch the content from the content providers’ mobile sites or applications,
and will see targeted advertisements along with the content. Wireless Service Providers
form a very important part of the value chain as the end consumers subscribe to the
carriers for mobile service.
Mobile Operating System Industry
The Mobile OS industry is a highly dual sided market3 which links two groups – handset
manufacturers and application developers – using a common platform (Exhibit 3). This
industry has a very strong cross-side network effect where increasing adoption in one
group is more valuable to the other group thereby forming a virtuous cycle. However
unlike the personal computer space where service providers do not have much say on
what software is installed on users computers, wireless carriers wield huge influence on
2

13. the software and OS that is provisioned on handsets. So far wireless carriers have been
reluctant to allow end users to install third party apps directly on their apps. But this has
been changing in the last year as carriers have realized they can’t stop the inevitable.
Six Forces Analysis – Mobile Advertising
Level 1 Analysis
The Level 1 analysis for the mobile advertising industry can be found in Exhibit 4.
Level 2 Analysis
Barriers to Entry
The players in the industry need both the advertisers and mobile content publishers with
a lot of viewership to succeed. Also, as the variable costs to support an additional
advertiser or content publisher is very low, there are high economies of scale. Even
though the capital costs of building a new mobile ad network are not high, the ad
networks need to partner with the mobile service carriers to get access to demographic
information to target their ads better. Also the mobile ads industry is nascent and
evolving industry and the various ad networks try to provide differentiation in their
offerings. Overall, these factors create very high barriers to enter and succeed for the
competitors in the mobile ads business and thus are favorable for the incumbents.
Rivalry
Mobile Advertisements Industry is expected to grow at more than 100% CAGR to more
than $10B in 2012. There are no clear winners yet in the market and the market is very
fragmented. The current leader in the mobile ad serving market is a Sequoia backed
firm AdMob. Consolidation has started, and bigger players have recently started
focusing on this market including Google with its AdWords and AdSense mobile, Yahoo
with its Panama mobile (Apex) platform, Microsoft, and AOL and Nokia with acquisitions
in internet and mobile advertising space. Current exit barriers in the industry are low
with bigger players acquiring startups, and the only transaction costs are intangible
costs and brand costs. As all the competitors are very diverse, it is hard to predict the
moves competitors will be making, such as Microsoft’s bid for Yahoo recently. Overall
we expect the rivalry to intensify, but given the high demand conditions, we think the
industry rivalry force is moderately favorable at this point.
3

14. Buyer Power
The 2 strategic buyer groups in this industry are the mobile content publishers such as
Yahoo, Sony, etc. and advertisers such as Coke, Disney etc. The advertisers pay
money to post their ads in different formats. The content publishers display the ads on
their mobile sites or applications and thus buy the ad inventory to display on their site.
Both the groups are highly important to the ad networks as they need both ad inventory
and publisher websites to display the ads from the ad inventory. The mobile ad network
hasn’t become as important to the advertisers4 and content publishers as mobile
technology is still evolving and companies are coming up with different ways to push
highly targeted ads to consumers without intruding too much. Both the advertiser and
publisher groups are fragmented with a few bigger players, who although do pose a
threat of backward integration, need all of the other players in order to ensure the
success of the network long-term. Overall we think the Buyer Power force is neutral to
the industry as both the buyer groups are very important to the firms, but given the
fragmented buyer groups, they really cannot exert too much power over the ad
networks.
Supplier Power
Given the two side nature of this industry, mobile content publishers and advertisers are
the two major supplier groups. Content publishers host the ads along with their content
to target the audience and thus supply the viewer eyeballs. An ad network firm in this
industry that can connect these two groups can be of tremendous value in this nascent
market. Also as suppliers, both the groups are strategically important to the firm to
create a network effect and generate the growth. While the industry is widely
fragmented, posing a forward integration threat, big companies could gobble up smaller
firms that have the first mover advantage. The high growth rate of this industry is also is
very attractive for the supplier groups to command a higher power. Given these factors,
we rate the Supplier Power as neutral to this industry
Threat of Substitutes
Internet based Cost per click (CPC), Cost per Action (CPA) model of internet ads,
eCommerce ads, TV, Newspaper ads are major substitutes for mobile ads. Increasing
proliferation of mobile devices will force the content publishers and advertisers to move
4

15. away from the traditional form of ads to mobile-based ads. Internet based ads will be a
major threat for mobile ads for several years until the advertisers see more potential in
the market. However, other traditional form of ads such as TV and newspaper ads could
see a reduced spending as advertisers move to mobile based ads. As content
publishers and advertisers see more value of the ad networks, they could forge a long
term relationship. However, advertisers do not have higher switching costs and can very
easily reach out to substitutes. Given these factors, threat of substitutes are moderately
unfavorable to the industry.
Complements
Key stakeholders in the value chain including advertisers, content publishers, and ad
servers can easily cooperate to offer better bundled offerings such as free internet ads
included with a certain volume of mobile ads. Through ad-insert type of services in
networking gear that provide more information on user groups, mobile service carriers
could complement the ad networks to offer higher value proposition for better targeted
ads to the advertisers. There are several big players in the industry. They could force a
takeover and asymmetrically integrate with ad networks to offer more value. Relative
concentration of the complementors is not high in this nascent market. Overall, we think
the complementors are a neutral force in this industry.
Level 3 Analysis
Our L3 analysis for mobile ads industry is outlined in Exhibit 5. We conclude that the
mobile ads industry is a moderately favorable industry. Given the dual sided nature of
the industry and the importance of partnering with wireless operators, we have ranked
the Barriers to Entry force as the most important force in this industry. Given the growth
potential and consolidation happening in this still young industry Rivalry plays a very
important role in the industry profitability. Only 3-4% of online advertising budget is
spent on the mobile ads, given the uncertainty in the medium. Given the huge chasm
the mobile ads industry will have to cross to become mainstream, Threat of Substitutes
is rated as the 3rd most important force in the industry. Buyers and suppliers in this dual
sided market are the same. Buyers and Suppliers groups in this industry are very
fragmented and form a very long tail. They play a minor role in the industry. Industry
growth will be driven by the complementors such as handset manufacturers, wireless
5

16. operators, consumers, and application developers. Although there are already 3 billion
handsets deployed worldwide and data penetration is increasing, it’s only a matter of
time before these players have to sit down (like in the Open Handset Alliance (OHA)
partnership), and solve the challenges for mutual benefit. We have rated this factor as
the least important as this force doesn’t shape the industry profitability.
Overall, we feel this is a moderately favorable industry with possibility of high profit
margins.
Six Forces Analysis – Mobile Device Operating System
Level 1 Analysis
The Level 1 analysis for the mobile operating system industry can be found in Exhibit 6.
Level 2 Analysis
Barriers to Entry
Barriers to Entry in the Mobile OS market are moderately high, primarily due to the
small number of phone manufacturers. The existing players in the mobile OS industry
will fight hard to hold their ground and are in a favorable position to push their new
products and work closely with phone manufacturers to provide driver software for their
hardware. Currently, there seems to be a fair amount of product differentiation. The
two major players, Symbian and Microsoft, offer software developer kits for application
developers. Unfortunately, when the application is built for one platform, it usually
cannot run on the other. The switching costs in this industry are also high. Phone
manufacturers usually choose a platform and have their in-house software team write a
complete set of applications for it. The costs to re-write the applications for a new
platform are both expensive and time consuming, especially in the phone equipment
market which is extremely dynamic. Overall, the strong barriers to entry make it
moderately favorable to the Mobile content industry.
Rivalry
The Mobile OS industry is a very high growth and fast changing industry. Only five
years back, cell phones were primarily used for voice communications, and now smart
phones have flooded the market with integrated GPS, Camera and a whole new set of
applications geared towards business and personal customers. This fast paced
6

17. business has led to extensive product differentiation which makes the product anything
but a commodity. The biggest resource in this industry is engineers. They are
primarily semi-fixed costs. When business is not good, the industry is known to reduce
costs by lay-offs. These employees are also not unionized thus reducing the exit
barriers. Overall Rivalry among competitors is considered favorable on the Mobile
content industry.
Buyer Power
There are two major buyers in this market – Application developers and Phone
manufacturers. There is also a big network effect created between these two buyers in
this industry. Applications written for a particular platform plays a very important role in
the decision making process for phone manufacturers, when choosing an OS for their
phones. Application developers tend to write applications for platforms which are
market leaders. The two groups have started working closely to provide feature rich
applications as seen in the recent agreement between Motorola and Yahoo5.
Mobile OS developers are strategically important for phone manufacturers to help run
their hardware, but the fact that the equipment industry is extremely competitive and
their razor thin margins force them to squeeze their suppliers – the OS developers. The
OS industry has worked hard to differentiate to increase their profits and reduce the
effects of the squeeze.
Application developers are always looking to develop applications quickly and with
limited resources. Their switching costs are also high as they need to re train their
employees on a new platform and re compile all their old applications to run on their
new platform. Overall Buyers influence is considered neutral on the Mobile content
industry.
Supplier Power
Application developers are highly important to the platform as they increase the value
drivers that mobile platforms offer and there are virtually no substitutes for them.
Customers are increasingly placing higher value to applications that are deployed in the
platform and hence application developers bring more value to the platform (network
effects). However this advantage in bargaining power is nullified since they are a highly
7

18. fragmented group. Overall suppliers influence is considered neutral on the Mobile
content industry.
Threat of Substitutes
The key advantage of Mobile applications is to enable access to content virtually at any
place. The alternatives that we consider (mainly PCs) do not offer this convenience
although the costs of switching are very low. Overall substitutes influence is considered
neutral on the Mobile content industry.
Complements
Wireless network service providers are the main complements to Mobile Content
platform industry. Engaging Mobile applications need higher bandwidth data networks
like 3G/4G - infrastructure that took almost a decade to set up - for faster access.
Service providers can also influence handset manufacturers to choose a particular
platform although we have seen that with the iPhone, a brand name can determine what
software platform is provisioned. Overall the high concentration of network operators
and their ability to influence demand pull make them unfavorable complements.
Level 3 Analysis
Our Level 3 Analysis for the Mobile OS Industry is outlined in Exhibit 7.
Our analysis concludes that the Mobile OS market is relatively Neutral with a score of 3.
In this two sided market, we feel that the buyers and suppliers, especially the Mobile
Manufacturers, have the most power as they decide which OS powers their phones. In
the Mobile value chain, the mobile phone manufactures are squeezed the most in terms
of price and are always looking to differentiate their products to increase their bottom
line. The service providers on the other hand have been maintaining tight control on
what applications go into mobile phones. This has been a detriment to application
developers who now have to sell their products to the service providers instead of the
consumers directly, thereby limiting much needed innovation and stinting growth in this
sector.
There are numerous changes happening in this industry, which includes the opening up
of the new C Block of the 700 MHz spectrum. Our belief is that this would shift power
from the complements (service providers) and bring the power into the application and
8

19. OS developers. Our Level 2 analysis indicates that the complements are the main
section of the industry making it more unfavorable. The jury is out on how the latest
trends in the industry would impact the industry, but it will definitely be more favorable to
the industry.
Macro Environmental Forces Analysis
Global Trends
Global mobile penetration is currently at 50% and expected to reach 1+ handset per
person in 2011, with the growth primarily coming from emerging Asian markets6. In
countries such as India and China, where wireline services are not developed, wireless
adoption is set to explode. This growth paves way for enormous revenue potential for
mobile ad markets. Mobile ad industry is expected to grow to $24B in 20137.
Because of cut-throat competition, ARPU is decreasing and service providers are
looking to differentiate by adding a lot of multimedia mobile services such as video and
GPS. With mobile broadband looking promising, mobile video is set to become a killer
application8 and provides a lot of opportunities for exploiting the ad revenue growth.
Mobile TV users have increased 68% compared to 38% growth in total mobile data
market in 20079(Exhibit 8).
Social Trends
Mobile phones have become a highly personalized choice of communication to
exchange photos, videos, ring tones etc. It is increasingly becoming a fashionable need
for the youth market in the age group 13-34.10 With OpenSocial, MySpace & Facebook
type of applications, users in this age group are increasingly using mobile phones for
their social networking11. Users in the age groups 35-54 are also adapting to use add-on
services. Exhibit 9 shows the social trend of usage from several countries. These trends
provide many opportunities to target ads based on the social groups, customer
preference and location. Exhibit 10 shows that US consumers are most willing to pay for
Location Based, maps services and entertainment services.
9

20. Technological Trends
Service providers are migrating from 3G to 4G to add rich services and enriched user
viewing experience. WiMax adoption by carriers is also helping broadband proliferation,
especially video services which are estimated to account for 40% of revenues in 2012.
Smartphones are increasingly becoming the communication device of choice and
manufacturers are keeping open the option to support multiple OS platforms such as
Symbian or Android. These technological advancements will help the growth of the
mobile ad industry.
Governmental/Political Trends
Any company that wins the 700 MHz C-Block wireless spectrum will have to abide by
FTC regulations on the usage of the spectrum. While Google’s move forced to open up
the spectrum, carriers have strong lobbies with the Government and could try to counter
Google’s move to disrupt the market.
Unlike the internet, wireless service providers have the user data and are obligated to
protect customer privacy. Ad networks have to work with carriers to ensure privacy and
at the same time invent techniques to better target the customer ads based on the
various social groups.
If Microsoft’s bid for Yahoo is successful, this poses a major threat to Google in the ad
space. Google might hence try and lobby the political circles to try and break the deal
and help Yahoo backdoors.
Ethical Concerns
Google, with its “Do No Evil”
philosophy, might have to fight hard
against service providers to win the
war of the open wireless spectrum.
Even if it wins the bid, it has a uphill
battle to ethically partner with mobile Figure 1 - Real Annual GDP Growth
service providers without damaging its public image. Google’s Open Alliance Forum has
several powerful stakeholders with different goals. Forum members should act ethically
10

21. responsibly and share the pie. Mobile spam and inappropriate advertisements with adult
content could also become a major concern in this industry.
Macroeconomic Trends
GDP growth varies widely across the world12, but the trend is clear from Figure 1.
Emerging markets in Asian and Latin America will continue to enjoy the growth while US
and European markets will stay flat.
China and India have seen phenomenal growth over the past 5 years with a boom in the
IT and manufacturing sector. Growth is expected to continue albeit at a slower rate.
With the recent threat of recession and stagflation increasing, US markets could pull
become a drag on world markets and average GDP could be lower than the estimated.
This could impact consumer spending on smartphones which could cause firms to cut
back on their mobile investments.
Demographic Trends
Mobile device penetration is growing fastest in the 13-24 age group, while the
penetration is lowest in the 13-17 teens age group13 (see Exhibits 11 and 12 ). SMS
use is very common in this age group. Social networking among this age group is also
becoming more popular. Penetration is higher across other age groups. Mobile users in
the 25-44 age group look for business applications. Varying usage patterns across age
groups call for targeted text and video based ads to reach out these diverse groups.
Competitor Analysis
Mobile Advertising Industry Competitor Analysis
Competitors
The mobile advertising market is still in its infancy and is highly fragmented with many
relatively small companies competing at the moment. Among the most promising of
these companies are AdMob, Third Screen Media (recently acquired by AOL), Ad
Infuse, and Smaato. Many of the large players in the internet advertising industry are
vigorously looking for ways to transfer their dominance in that market into the mobile
advertising market through internal research and development and acquisitions. For
example, Google has already developed mobile versions of its AdWords and AdSense
advertising platforms and are developing Android, a new mobile device platform through
11

22. which they hope to push advertisements to mobile users. They also recently acquired
DoubleClick, which, although is primarily an internet advertising marketer, has been
making inroads into the mobile market. Yahoo has also created their own mobile
content and advertising platform, called Apex, that leverages its sophisticated internet
advertising knowledge. Microsoft has also taken its MSN services mobile and recently
acquired Screen Tonic, a European based leader in mobile advertising. In addition to
this acquisition, Microsoft is pursuing a now hostile bid for Yahoo. This move has major
implications for Google and the internet and mobile advertising industry. It is still
unclear, however, exactly how the merger would change the landscape of the
competition if it does indeed happen. It seems likely that the same large players that
currently dominate the internet advertising market will eventually be the ones left
slugging it out for mobile advertising market share. Because of this and since the
mobile advertising market is still too small and new to have a useful amount of industry
data, much of our competitor analysis in the advertising space will focus on the internet
advertising market with the assumption that the competition in the mobile ad space will
be similar in nature.
There are many players in the internet advertising market including Google, Yahoo,
Microsoft, AOL (Time Warner), IAC, MySpace, Facebook, Valueclick, NexTag, and
literally thousands of other companies including advertising firms, media companies,
and other individuals and businesses who
sell advertising on web sites or via other
electronic means such as email. Despite
the huge number of players, the market is
dominated by a few large firms that have
turned internet advertising into big business.
The top four firms in this market account for
approximately 57% of the worldwide market. Figure 2 - Internet Ads Revenue Market Share
Google leads the pack with a 30% market share, followed by Yahoo with a 15% share,
and Microsoft with 7% (See figure 2).
12

23. Primary Competitors
The two major competitors to Google in the online advertising market are Yahoo and
Microsoft (via their MSN division). All three of these firms enjoy relatively large
networks of both advertisers and users,
their brands are well known, and all enjoy
large shares of the internet search market
(See figure 3).
This last point has become increasingly
important as advertisers strive to put more Figure 3 - Search Engine Market Share
relevant ads in front of users. Search based advertising allows them to do this by
displaying ads related to the search keywords a user enters. Search based advertising
made up 40% of the U.S. internet advertising market in 200714 and, again, Google,
Yahoo, and Microsoft are the top three firms in the market (See figure 4).
Competitor Strategies
Google
Business Level
Google’s search tools and internet software products are targeted towards all internet
users which can safely be called the mass-
market today. They emphasize their cutting-
edge search algorithms and information sorting
capabilities in all of their products in an attempt
to differentiate themselves from their
competitors. Google is, therefore, using a
broad differentiation business level strategy.
Figure 4 - Search Based Advertising Market Share
They can also be classified as using a variety based strategy since they are striving to
meet the internet search and information location needs of a broad set of customers
and have not diversified into other software and hardware markets.
Corporate Level
While upwards of 99% of Google’s revenue comes from advertising sales15, 91% of
after TAC revenues come from ads displayed on Google owned sites. These include
search results pages, Gmail, Google Docs, Orkut, etc. The remaining 9% of revenues
13

24. come from ads displayed on what Google calls “network sites” which are sites that allow
ads to be placed on them in exchange for a payment from Google. This split varies
around these percentages, and thus, Google is employing a dominant constrained
corporate strategy.
Yahoo
Business Level
Like Google, Yahoo markets their websites and products to all users of the internet.
Also like Google, they too seek to differentiate themselves from other internet portals.
However, Yahoo attempts to do this by attempting to provide an all-in-one content
destination where users can search, read news, email, book travel, view photos, and
shop, to name a few, all from one place with a consistent user interface. But
differences aside, Yahoo is still attempting to differentiate themselves in the mass
market which equates to a broad differentiation business strategy. Within this strategy,
Yahoo could be classified as using a cross between a needs and variety based
strategy. Although they do only provide internet based services, the variety of services
they provide is larger than that which Google provides.
Corporate Level
Yahoo generates revenue from two sources. They call the first source “Marketing
Services” which includes advertising and advertising consulting fees. This is basically
advertising revenue and encompasses approximately 88% of Yahoo’s revenue. Their
second source of revenue is from fees that are charged for premium services at their
and their affiliated websites. These fees account for the remaining 12% of total
revenue. Although these two sources are vertically related, they are not exactly the
same business and, thus, Yahoo is employing a dominant corporate strategy.
Microsoft
Business Level
Microsoft also employs a broad differentiation based business level strategy, but does it
in a much more diverse fashion than do Google or Yahoo Microsoft has many different
business units ranging from PC operating system software, to video game systems, to
online services. Some of their business units may be focused on niche markets, but
generally, they are targeted towards the mass market. They also primarily compete on
14

25. differentiation by designing their products with appealing and/or useful features in
comparison to producing products at the lowest possible cost.
Corporate Level
As mentioned above, Microsoft has much more variety in their products and revenue
sources than do Google or Yahoo. Their business units and corresponding revenue in
FY2007 are detailed in Figure 5 below16.
Figure 5 - Microsoft Segment Revenue
While most of their business units create software as all or part of their business, the
software products are targeted towards different uses and users. Therefore, for our
purposes, we will consider them different businesses. Based on this premise, Microsoft
does not obtain greater than 70% of their revenue from any single business. Since
most of their business units do share numerous links and common attributes, we can
classify Microsoft as employing a related constrained corporate strategy.
Achieving Strategic Positioning
Competitors achieve their strategic positions by effective use of resources and
capabilities. Exhibit 13 compares the value and cost drivers and the resources and
capabilities of the three market leaders in the online advertisement industry.
On the innovation front the key value attributes are reach, relevancy and quality of
search. Google is highly creative in designing a wide variety of user-attractive
applications centered on search technology. Yahoo is similar to Google in its product
portfolio. On the marketing front, Google became popular primarily through viral
marketing. Microsoft has the marketing muscle to push its software products for PCs
and laptops. On the cost front, Google has a focused investment strategy spending
11-12% of revenue in R&D expenses. Microsoft and Yahoo spend around 14% of
15

26. revenue towards R&D. All three companies have very good brand perception with
Microsoft leading the pack. Google enjoys a higher customer loyalty by focusing on free
value added end-user applications.
Value - Cost /Willingness to Pay Analysis
In this section, we examine the buyer’s willingness to pay by comparing the key
attributes such as the reach, relevancy, quality, market and cost factors that drive the
value and cost in the search advertisement industry for Google, Yahoo and Microsoft.
The steps used to determine the value, price and cost using these attributes is
described below. Exhibit 14 presents the quantitative model used in this analysis to
determine the value perceived by a buyer.
Value
The first step is in this process is to estimate the value of the three leaders in this
industry. Reach is an important measure of the number of impressions a firm can make.
This is primarily determined by the popularity of search engine and various applications
provided by the firm to the end-users. Privacy and the viral effect of these applications
are increasingly playing an important role in achieving a wider reach. Relevancy of a
search is the next important factor that attracts end-users to generate a high click
through rate. Quality is another important attribute and this is a direct measure of the
ROI in terms of how many clicks converted into a sale or a registered action for an
advertiser. Quality is also measured by the ease of user interface to place and monitor
the advertisements. Market factors such as the brand equity and customer loyalty add a
lot of value to the firms in customer retention and expanding the market value. For each
one of these attributes a weight is assigned and the three companies are ranked. Based
on this analysis, total value perceived for all these attributes is 3.94, 2.95 and 2.21
respectively for Google, Yahoo and Microsoft.
Price
Based on the efficient frontier report17, the price of an advertisement is the average cost
per click charged by these firms. While Google and Microsoft match their price, Yahoo
offers a lower price point.
Cost
16

27. The next step is in this process is to estimate the factors that drive the cost. The
average cost of an advertisement depends on several factors that are specific to each
of these companies. For example, a majority of Google’s cost would be from its COGS
on its storage servers. But the same servers are also used for other applications. Yahoo
and Microsoft also achieve cost synergies by leveraging their infrastructure from other
technologies. The exact cost is not easily determinable and hence we have used their
Gross Margin and the average price (ASP) to come up with the cost structure.
Relative Value, Price and Cost
Relative value, price and cost are obtained by dividing Yahoo and Microsoft value, price
and cost with Google’s value, price and cost, respectively. These values form the basis
for determining the economic contribution and the buyer surplus for the three leaders.
Economic Contribution and Buyer Surplus
Figure 6 shows the economic
contributions and the buyer surplus
for the three firms. Google
commands the highest economic
contribution, 27% higher than
Yahoo and 48% higher than
Microsoft. Google also has the
highest buyer surplus, 33% higher
than Yahoo and 78% higher than
Figure 6 V-C Competitor Analysis
Microsoft. This chart clearly speaks
volumes about the dominance of Google in the search ad industry.
Comparative Financial Analysis
In evaluating the financial position and performance of Google versus its primary
competitors, several key metrics and financial ratios from the past six years have been
selected for comparison. These have, in turn, been broken down into five categories;
Growth, Profitability, Liquidity, Leverage, and Operational Efficiency (see Financial
Exhibit D). Because of the differences in Microsoft’s business strategy, its ratio
comparisons may not be as applicable as the comparison between Google and Yahoo.
Because of this, an average of the three firms in each category is included in the
17

28. comparison in lieu of an industry average. The value of this is still somewhat
questionable, especially with only three firms making up the average, but it at least
gives a reference point when comparing data.
Growth
Google has experienced tremendous growth in the past five years with an astounding
114.6% average yearly revenue growth rate. Since Google is the youngest company of
the bunch, this may be expected, but even in 2006 and 2007, Google has achieved
revenue growth of 72.8% and 56.5% respectively. After recovering from the end of the
internet bubble in 2001 when it suffered declining revenues, Yahoo experienced
increasing growth from 2002 through 2004 when its revenues grew 120%. However,
partly due to an overall economic slowdown in the US beginning in late 2005, Yahoo’s
revenue growth has slowed since. Microsoft is the most mature company of the three
and so it is no surprise that its revenue growth is both smaller and less volatile.
Microsoft followed a pattern similar to that of Yahoo, with increasing growth from 2001
through 2004, then pulling back until the past year when growth increased again.
Microsoft averaged 12.5% yearly growth between 2002 and 2007 and never varied
more than 4.5% from that average. See Financial Exhibit E for a graphical comparison
of the three companies’ five year growth.
Profitability
While Google has not had the highest profit margin of the three since 2002, and even
lagged both Yahoo and Microsoft for much of the time period, their margin had been
constantly increasing since 2003 until the most recent year. In 2006, Google led the
three with a 29.90% profit margin but slipped just back behind Microsoft in 2007. Yahoo
had impressive profit margin growth between 2002 and 2005, but then took a major hit
in 2006 dropping from 36.1% in 2005 to 11.7% and then 9.5% in 2006 and 2007. Part
of this drop could be explained by increased spending on research and development
which increased in 2006 and 2007, and increased its capital expenditures that
increased from approx $409 million in 2005 to $698 million and $602 million in 2006 and
2007, respectively18. These expenditures were likely due to the increased competition
Yahoo was facing from Google. Microsoft consistently maintained net profit margins
between 2002 and 2007 with an average margin of 27.9% over the six years.
18

29. The return on equity and return on assets for all three companies generally followed the
same trends as their net profit margins although Yahoo did not typically earn as good of
a return on their assets or equity as Google and Microsoft were able to and was hit
much harder in this aspect by the popping of the internet bubble in 2001. Google has
consistently been able to earn a greater return when compared to total assets than has
Yahoo or Microsoft. See Financial Exhibit E for a graphical comparison of the three
companies’ five year profitability.
Liquidity
Analyzing the current ratios of the three competitors shows the superior liquidity position
that Google is in when compared to Yahoo and Microsoft. This is partially because of
Google’s cash position. Google’s ratio of cash and short term investments to assets
has consistently been much higher than has Yahoo’s or Microsoft’s. Google stands a
very low risk of having any trouble paying its short term liabilities. See Financial Exhibit
E for a graphical comparison of the three companies’ five year liquidity positions.
Leverage
Currently, none of the three companies hold any long term debt. Yahoo and Google did
incorporate some debt into their capital structures in the past, but Google paid theirs of
in 2004 and Yahoo in 2007. See Financial Exhibit E for a graphical comparison of the
three companies’ five year debt positions.
Operational Efficiency
Of the three companies, Google has kept the lowest average DSO (Days Sales
Outstanding) over the last five years. They have averaged 35.1 days over that period
compared with Yahoo’s 44.8 days and Microsoft’s 63.0 days. As mentioned previously,
Microsoft may have a significantly higher DSO because of the differences in the nature
of their businesses and industries in which they are in. See Financial Exhibit E for a
graphical comparison of the three companies’ five year DSO performance.
Mobile OS Industry Competitor Analysis
Competition
Mobile OS industry is an oligopoly competition that can be broadly classified into three
major groups with a few main players competing for market share. The three groups
19

30. are the Mobile OS platform group, Mobile application development group and the User
Interface (UI) framework group.
Primary Competition
Primary competitors in the Mobile application industry are based on three factors:
• Economies of scale / OEM adoption
• Third party software ecosystem
• Openness of API
While in the Mobile OS group Symbian, Microsoft Mobile, RIM and Linux are the main
players with 95% market share among them in 200719, the Mobile application
development environment is primarily
dominated by Sun’s JavaME and
Qualcomm’s BREW platforms.
Symbian (65% market share in 2007, see
Figure 7) was formed in 1988 as a
consortium of Nokia, Ericcson, Motorola and Figure 7 - Mobile OS Marketshare
Samsung. It has been the de facto standard for a mobile operating system as far as
installed base and software architecture system primarily due to its association with
Nokia.
Windows mobile (12% market share) is an evolution of Microsoft’s long standing
attempt to break into the Smartphone OS market. Microsoft’s footing was primarily
based on one handset manufacturer – HTC – although there has been the now popular
Blackjack models from Samsung in the last year.
Apple’s OS-X that has been used in the iPhone was introduced in the second half of
2007 and is estimated to have captured almost 28% in the U.S. and 6.5% of the global
market share in Mobile OS market20. Apple recently announced opening the iPhone
SDK to third party developers.
20

31. RIM OS (6% market share) that is used in Blackberries is not a commercially available
OS but a proprietary solution. However it exposes API’s so that third party developers
can create applications for its OS.
Competitor Business and Corporate Strategies
Symbian
Business Level
Symbian follows a broad differentiation business level strategy by focusing on
performance value drivers. Unlike other operating systems, Symbian was specifically
developed for the mobile device and so it is extremely efficient with processor overhead
and power consumption. Symbian has been optimized to run on a memory footprint as
low as 32 MB so that applications can have the lion’s share of the total memory
available.
Corporate Level
Symbian follows the dominant constrained business strategy with about 90% of its
revenues coming from licensing fees.
Microsoft
Business & Corporate Level Strategy
As discussed in the earlier Mobile Advertising competitor analysis, Microsoft employs a
a broad differentiation based business level strategy, and a related constrained
corporate strategy.
RIM
Business Level
Like Microsoft RIM follows a focused differentiation strategy by targeting business
customers. It started as a company that offered pagers for IT professionals in critical
support functions. Over time it has evolved to add e-mail and other services under a
very secure environment. Instat’s research shows that Blackberry is the brand choice
for over 30% of devices21 that are provided by employers.
Corporate Level
RIM follows a related constrained strategy where a major chunk its revenues comes
from devices (73%)22 but then it is closely related to revenues from services and
software fees.
21

32. Apple
Business Level
Apple who ignited the personal computers revolution in 1970 follows a focused
differentiation strategy by capitalizing on the convergence of the personal computer and
digital consumer electronics by creating aesthetically designed products such as iPod,
MAC and iPhone. It has innovative business models to seamlessly integrate its
consumer products with applications (e.g. iPod + iTunes).
Corporate Level
Apple follows a Dominant constraints strategy with 84%23 of its sales coming from sale
of MAC, iPod and iPhone products and the rest from iTunes and software applications
and services.
Competitors Strategic Positioning
Exhibit 15 shows how Google’s competitors build their market position by leveraging
their resources and capabilities. Microsoft and RIM increase their value to enterprise
customers by offering highly differentiated services. For these players, increasing value
provides better returns than cost efficiencies. Symbian builds a unique position by
complementing their value and cost drivers rather than substituting them. Apple has
developed a niche position by bundling highly stylized services – iTunes – with their
product. All these players built unique imitation barriers and customer retention
measures to defend their positions.
Implications of Competitive Analysis
Industry
In the sections above, we have detailed that the Mobile advertising market is highly
fragmented and is in infancy. Bigger players, especially Microsoft’s MSN division,
Yahoo, AOL, and Google want a piece of the pie and are gobbling up smaller players to
be a dominant force in the mass market mobile advertising industry. Although the
primary revenue drivers for all of these players are advertisement, they have all
differentiated themselves with some of them primarily based on their search technology,
while the others attempt to provide an all-in-one content destination with some licensing
and usage based revenue. The industry as a whole is betting big on mobile ads as it
provides a more personal and targeted audience for their customers.
22

33. The Mobile OS industry is more concentrated with the big players owning 95% of the
market share. The key to succeeding in this industry relies primarily on partnerships
with mobile phone manufacturers and to have easy to use tools available for developers
to churn out cool applications.
Yahoo has taken the lead with a new mobile platform and now with its Yahoo Mobile
Software Development Kit (SDK) offering. For Google to succeed in this industry, it
needs to leverage its existing dominance in the internet advertising. Also, its bet with
Android will definitely help with adoption rates and porting all of their applications for
mobile devices. In addition to enhancing mobile browsing experience, Android will
provide an advertisement platform that can support applications and bring revenue for
both the developers and Google.
Rivalry and Google’s Strategy
Google’s Android is changing the game in Mobile OS industry, which until now was a
paid offering. Android, built on Linux, is a freeware and comes with a SDK. For a start
Android should be able to take share away from current Linux OS customers. Both
Symbian and Microsoft will now fight hard to keep their share of the market. In the case
of Nokia, which helped develop Symbian and uses it for all of its phones, Symbian will
continue to enhance its feature set as Nokia phone sales depend on this OS. In the
advertisement areana, we have already seen moves by competition aimed at stifling
Google’s grand plans. Microsoft has made a strategic move to acquire Yahoo, which
consolidates the second and third place competitors. Overall, in both industries, we find
that Google has made adequate plans, big names in Open Handset Alliance as
partners, and a release of their AdWords and AdSense platforms for mobile to counter
any competitive threats.
Intra-Industry Analysis
Intra-Industry Analysis – Mobile Advertising
Industry evolution
Mobile Advertising industry kicked off around mid 2000 when NTT Docomo & Dentsu’s
established a joint venture in Japan24 and when AT&T PocketNet banner ads started
their ads trial in US in 2001. Initially it followed the internet model of presenting banner
23

34. ads similar to ads on browsers on internet and SMS ads which were somewhat similar
to emails. The mobile industry was highly hyped like any other industry in the dot.com
boom in 2000 and was projected to grow to $2B - $6B by 2005 (Exhibit 16). The
projections were not realized and the industry is at about $1.6B in 200725. These early
experiments failed primarily because the business models were around the internet and
didn’t take into account the different industry structure in mobile. Today Mobile
Advertising has evolved and covers a wide range of segments such as advertising on
mobile browsers in search and mobile websites, advertisement sponsored directory
assistance and advertising in multi-modal applications using voice and data. Exhibit 17
depicts the timeline of how the industry evolved.
Strategic Groups
The Mobile Advertising platform industry is still young and evolving and is a very
fragmented industry. The Mobile Advertising platform industry is divided into the
following strategic groups: Mobile Ad networks, Mobile Ad Servers, Content
Providers running their own ad business, Wireless Service Providers relying on
mobile advertisements to generate more revenue or subsidize subscriber prices.
Another important strategic group to watch out for this industry is the internet ad
networks and servers which are trying to enter the mobile space. Refer back to Exhibit
1 for a graphical depiction of these groups.
Mobile Ad Networks
Mobile ad networks connect the advertisers who conduct mobile advertising campaigns
with the content publishers that are willing to display the advertisements. Based on
relevancy algorithms and advertiser preferences, ad networks match inventories of
advertisements to websites. Unlike the internet, ad network industry where Google is
the clear leader, there is no clear leader in the mobile ad network today. Third Screen
Media (TSM) was the first ad network for mobile. It serves more than 225 million
monthly advertising impressions across more than 185 mobile content sites including
AccuWeather, Boston.com, Fox News, Maxim, WWE, etc. TSM was acquired by AOL
for about $90 in mid May 2007. Admob is the largest mobile ad network today claiming
to be serving over 2 billion targeted ads each month26. Google AdWords and AdSense
was released on mobile mid 2007. Yahoo’s Panama mobile ad platform was announced
24

35. in Dec ‘07 and in Feb ’08 Yahoo announced Apex – its multi platform digital ad effort.
Millenial Media’s Decktrade platform has a similar model to Google AdSense.
Mobile Ad Servers
Mobile Ad servers serve highly targeted ads to mobile consumers. The targeting could
be based on user preferences, profile, location, social network of the users etc. – data
available to mobile ad servers through their partnerships with wireless service providers
and data they have collected over a period of time. Ad servers also provide ad
campaign management platform.
ScreenTonic is one of the Ad servers that serves text and banner ads on portals, text
messages and mobile web pages based on location based services. Microsoft acquired
Screentonic in May ’07 and will likely use it to serve ads on mobile devices, Xbox, and
windows live mobile spaces. Nokia acquired an ad serving company – Enpocket in
September ’07 to enter this market. Doubleclick – acquired by Google in April ’07 - has
a mobile platform (DART) to serve targeted ads to mobile users. Smaato provides ad
serving platform to distribute ads to mobile phones in running applications in addition to
the browsers. This format allows mobile game and application developers to monetize
their applications using mobile ads.
Mobile Content Providers
Popular mobile websites and applications are very valuable to the advertisers, as they
bring in a lot of mobile consumers. The most popular types of content driving advertising
traffic are expected to be mobile TV, music, and search and display. (Exhibit 8) Some
ways content providers can monetize their content are calendar applications that can
promote event ticket sales, contact applications for business leads, mobile video
applications, and mobile games.
Their revenue source is either subscription or mobile ads. The larger content providers
such as TV content providers like CBS maintain their own advertising network as well.
Mobile content provider Accuweather.com, Mobile video provider mobiTV, mobile
games provider EA mobile, etc. are some of the larger players in this group.
Wireless Service Providers
25

36. The Wireless Service Providers (WSP) such as AT&T, Verizon, Vodafone, T-Mobile, are
the gatekeepers of the handsets and content available to their subscribed users. They
control which devices can operate on their networks and what applications can run on
the phones. There are primarily two mobile browsing models. WSPs control the on-deck
or WAP-deck experience. These are the services offered by the WSPs and
advertisements and content for the on-deck experience is completely controlled by the
operators. Off-deck model refers to the services that are not part of the handset and
WSP services. These are the services consumers directly access. The main control
WSPs have in this case is whether to allow off-deck experience or not. Most of the ad
networks offer ad syndication for the off-deck model.
Internet Ad Networks and Ad Servers
This strategic group comprises of the current market leaders in internet ad network and
serving businesses. This strategic group is very important for the future of mobile ad
space, as these companies will try to gain a foothold once the model is proven. Also
they will have an advantage of their size in internet space and a large customer base of
advertisers and content publishers which they can pull in. Market leaders in this space
are Google AdWords/AdSense platform, Yahoo’s Panama ad network, Microsoft
Adcenter (including its acquisition of aQuantive), DoubleClick’s DART platform for ad
serving, etc.
Mobility Barriers
In the mobile world targeting is very important, so the gap between mobile ad networks
and ad servers needs to reduce. Google has bought DoubleClick which can potentially
combine the user behavioral targeting with the ad network that Google has. Microsoft’s
adCenter and aQuantive Ad network platform is enhanced to provide behavioral
targeting through its acquisitions such as Screentonic.
The WSPs are trying to monetize their networks further and don’t want to turn into
“dumb pipes” as they have become in the internet space.
The internet ad platforms and servers are also entering this space as mobile advertising
starts to pick up. They have been trying to establish a presence in the market with
preemptive and market exploratory acquisitions.
26

37. Disruptive Innovation
Mobile ads promise was seen by some of the early mobile ad platform startups. The
early startups started with simpler solutions such as SMS based ads or banner ads on
mobile browsers. Both these forms of
advertisements have annoyed customers.
There are still a lot of challenges to be
solved before the market realizes it’s
potential. Technology has to improve and
ad targeting needs to be very innovative
and can’t follow the internet ad serving
model to allow the mobile ads business to Figure 8 - U.S., Wireless Voice ARPU
gain traction. The mobile handsets have to improve to make the phones easier to use
for data access.
Given all the constraints, advertisers haven’t flocked just yet to the mobile ads platform.
They are still only testing the waters and the bigger ones are hedging their bets by
putting in only 3-4% of their online ad budget in mobile.27 Once the promises of
targeting, reach and usability are addressed, the mobile ads business will become a
much more lucrative business as the clickthrough rates are 10 times higher compared
to internet ads28. As the market is at the tipping point, the incumbents have started
watching the industry very closely and are entering early.
As their Voice ARPUs have faced downward pressure as seen in Figure 8, WSPs are
looking at innovative revenue models such as subsidizing the subscription fees by
making consumers watch more ads. WSPs face a serious threat from Mobile Virtual
Network Operators (MVNO) carriers such as Virgin Mobile in US and Blyk in Europe
that are trying this type of disruptive model.
Intra-Industry Analysis – Mobile Operating Systems
Industry Evolution
Mobile applications have their roots from early day PDAs. Over the years, handset
manufacturers combined the features of a PDA and phone into a single device – the
“smartphone”. According to Instat a smartphone is defined as “a mobile phone running
27

38. an operating system for which the handset’s owner can download programs written by
an ecosystem of third party developers without the support of handset manufacturers or
mobile operators”.
Customers who have feature phones (a.k.a. dumb phones) have to almost always
switch newer handset models when they wanted new and improved features. With the
advent of smartphones and faster networks, downloadable mobile applications are
becoming more prevalent. The two most popular applications according to Instat29 are
Personal Information Management (PIM) and e-mail. Of late, location based services
(LBS) that allow users to choose their points of interest have become an attractive
mobile application with the rapid adoption of GPS technologies.
As smartphones integrate more and more functionality that are currently accessed from
different devices such as personal navigation devices (PND), portable media players (PMP),
Cameras, PDAs and such the growth of mobile applications will further increase. ABI Research30
estimates that the global smartphone market will grow from $18.5 billion in 2006 to over $74.9
billion in revenues by 2012. One out of every 4 mobile phones will be a smartphone.
As the wireless industry growth saturates, carriers have realized that they have to differentiate
themselves on data services. The increasing number of features on upcoming smartphones
clearly indicates that smartphones are no longer primarily for business users. In earlier years,
smartphones were mostly adopted by business and enterprise users who needed to be
connected to their office at all times. But now with the increasing features in these devices and
the services they support, even general consumers want that level of connectivity. Data usage
is beginning to take off with rollout of 3G and 4G technologies and this will increasingly shift
focus to what kind of applications will be provisioned on the phone. What this means is there
needs to be a platform to support these complex offerings that will enable long term growth.
Strategic Groups
The mobile platform ecosystem has following strategic groups based on their value
drivers.
Mobile OS
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39. Operating systems which include an integrated application platform that allows third
party developers to create software applications that can work together seamlessly.
Examples of these include Symbian, Linux, Windows Mobile, RIM OS, and Palm OS.
Application Development Environment
Middleware application environments are operating system agnostic. They allow
applications to be developed without accessing core OS features. These include
JavaME, BREW, and S60.
User Interface Frameworks
Graphics component engines give applications a desired look and feel. These include
GTK+ and Trolltech.
Mobility Barriers
There are several mobility barriers that players use to defend their strategic position
against encroachment from rivals. These are processing power and software limitation,
portability of applications, OEM support, software vendor ecosystem, out of the box
solution.
Disruptive Innovation
Mobile applications were originally meant to replace PDA basic functions like PIM
applications. As the mobile application industry evolved, new applications started to
supplant some of the functionalities of a laptop. For example a business traveler that
uses a laptop for the sole purpose of checking e-mail can now carry a Blackberry phone
to do the same thing31. Similarly applications that offer location based services are
replacing the traditional 411 enquiries to access points of interest. Instat’s research
report Converged Devices: SmartPhones vs Laptops and PDAs in Business Markets
states that “The respondents, all of whom are in the US, were fairly open to the idea of
using their smartphone as their primary computing device, but it would require a larger
screen and keyboard”. This disruptive trend is still in its early stages but the shift is
getting pronounced in recent times.
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40. Threats and Opportunities Analysis
Threats and Opportunities – Mobile Advertising
Threats
The mobile advertisement industry has been around for a while, but has been
underperforming significantly when compared to past expectations (Exhibit 16). There
are several reasons why the industry has disappointed so far.
Wireless Data Growth not as expected
Mobile ads industry depends highly on the data penetration on mobile phones as video
ads, search ads and banner ads are the primary growth drivers. The growth in data
penetration has been shunted primarily because data access prices are still too high in
the US. Also data speed hasn’t been fast enough to allow widespread broadband
browsing experience on the phones. Until the iPhone was released, phones didn’t focus
on usability and ease of browsing. Last but not the least, carriers want to control the
browsing experience on the phones. This has caused severe constraints on the phones
as users are not easily able to navigate to various sites, download applications, and
view videos unless operators integrate the content providers’ applications on the
phones.
User Targeting vs. Privacy conundrum
The vision of targeting ads to consumers based on their preference, demographics and
location hasn’t worked out so far because of the partnerships needed to make it
happen. The technology has been in place, but the ad platform companies need to work
with wireless service providers very closely to provide better targeting. With wireless
service providers also wanting to monetize from the mobile ads, the partnerships
haven’t been working out too well so far. On the other hand the users’ privacy concerns
have been hampering penetration of location and behavioral targeting.
Its Complex! Mobile is not the same as Online
AT&T Pocketnet’s trial of pushing banner ads to mobile phones in 2001 failed because
users were asked to pay for the bandwidth used while pushing ads to their phones; ads
that took up more than half of their screen size. The mobile world is complex and very
different than the internet ad industry. Here’s what content provider CBS SVP Cyriac
Reading had to say at a recent mobile advertising panel discussion32:
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41. “How are we expecting [advertisers] to take [the mobile phone] as an advertising device seriously if we
keep telling them about the unbelievable complexity that arises out of the fact that we have 20 carriers
in the US, 2 basic technologies – GSM and CDMA, and 2 downloadable standards – BREW and J2ME with
different versions on different handsets, and then we have mobile TV and VCast but only on some
handsets for $50/month. Why don’t you add a few more complexities and then talk to the advertisers
and say – Why don’t you spend a few thousand dollars on mobile advertising to try out, it’s really fun!
That’s why iPhone version 1.0 has such a high penetration! It’s simple!”
Ad platforms, advertisers, content providers and wireless service providers have to think
creatively and collaboratively to provide a very different way to distribute ads to mobile
phones. Standard banner ads don’t work on the smaller screen size of the mobile
phones. Dropping a successful business model that has worked so well on the internet
has been hard for the players. Innovation is required to make mobile ads successful.
Without that, the consumers will get annoyed and turned off with this model quickly.
Opportunities
No clear market leader established yet
There are smaller players in the industry where a lot of consolidation has been
happening. But nobody has been able to establish a clear market leadership position
yet. Admob serves about 2 Billion ad impressions per month. This is still very small
compared to the internet space. This provides a very lucrative opportunity for the
incumbents in internet ad networks and wireless service providers as they can tap into
their existing networks and fuel the market. Incumbents can also establish their
presence by acquiring market leaders in the space. This will help them learn the new
industry as well.
Data penetration projected to increase
There are several drivers behind this projection. The decelerating voice ARPUs has
motivated to push wireless data as the next growth area. The handsets available today
are more feature rich and are able to offer a great multimedia experience33. To go with
this, 4G networks will soon bring broadband capabilities to the phones making them
very powerful and useful devices. With FCC mandating the winner of the C block of 700
Mhz spectrum auction to open up its network, wireless service providers will have to
look at newer ways to monetize their networks.
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42. Targeting works wonders for advertising
Mobile advertising satisfies some of the basic advertising requirements, however, needs
such as Reach, Targeting, Engagement, Viral and Transactions34 haven’t been
achieved yet. To make an ad campaign work on mobile, the advertisers will be able to
do targeting better with a more engaging and interactive user experience. The
campaigns will be inherently viral if they are highly creative, as mobile is a highly viral
medium. One more feature of mobile world is the immediacy factor. If the ads are tied to
a transaction, the consumers will find it very convenient and useful. The company which
satisfies these requirements will be far ahead of the competition. And there is a lot to
look forward for the winner. Because of the two-sided market, with the increase in the
clickthroughs, the advertisers will flock to the winner.
Threats and Opportunities – Mobile Operating Systems
The major threats and opportunities have been identified and discussed in the industry
six forces analysis. Also as businesses understand the value of using mobile
applications for different business processes (information gathering, collaboration etc) to
utilize resources to the maximum extent and be profitable, opportunities will evolve.
Similarly there will be a virtuous cycle because of new applications like video sharing
and unified messaging that will lead to increased advertising opportunities. As the user
interface experience becomes more sophisticated (like the touch UI in Apple iPhone)
due to improvements in hardware, it will have a positive reinforcing effect on the mobile
platform. On the flip side, the emerging category of “ultra low-cost handset” - in
countries like India35 - that offers stripped down cell phones at a very low price will be a
major threat for this industry.
Summary of External Analysis
In our Industry Analysis, we found that the Mobile industry is growing at a rapid pace on
all fronts, including mobile content, mobile internet speeds and mobile adoption.
Today the mobile content usage
is at the Tipping Point36. Google,
with its announcements of
Android platform and bid for
32
Figure 9 - Global Advertising Spend by Category

43. 700Mhz wireless spectrum is championing the cause of mobile data. Apple, with its
banner launch of iPhone in 2007 also has acted as a connector, to create the buzz
around mobile data access. Consumer demand for data access on mobile phones has
been established with the iPhone, with its bundled data plan, taking almost 28% of
market share from the sales in Q437. In the words of Apple CEO Steve Jobs at the
iPhone SDK conference: "As you know, the iPhone really brings the internet to a mobile
device for the first time, you have the internet in your pocket -- and that's being borne
out by usage stats for mobile browser usage. 71% of US mobile browser usage!" Our
industry Analysis concluded that Barriers to entry are pretty high at this time, primarily
because of much needed partnerships with Mobile Service providers to get more
information about the users. The 700MHz spectrum auction has cleared the way for a
shift in control from the service providers to everyone else in the value chain, which
includes phone manufacturers and content / application developers. With this growth in
the market, there is huge potential for Mobile advertising as well.
The mobile ad industry is expected to grow much faster than the other advertising
channels according to a study conducted by IBM’s Institute for Business Value38 (see
Figure 9).
The industry has realized that mobile has unique strengths such as context, immediacy
of response, and personalization 39. They understanding that mobile experience is
different than the internet experience has translated in innovations of technology and
business models in mobile ad industry especially because half of the big brands are
concerned that mobile advertising will be considered too intrusive by consumer40.
Based on our analysis, we conclude this section by saying the industry is poised to
explode and there are many opportunities for both mobile advertising and mobile
OS/platform players in this market.
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44. III. Internal Analysis
Business Definition / Mission
Google's mission is to organize the world's information and make it universally
accessible and useful41.
Well known for its search technology, Google was incorporated in September 1998. Its
servers running all over the world keep track of Websites, and make this information
freely available through their search results. It has successfully integrated this
technology into its numerous products which include a free email service, document
editing on the web, news feeds, maps, stock quotes, image search, shopping, online
payment service and custom search tools for business websites. Google has been able
to gain market share from its main competitors Yahoo and Microsoft through its ease of
use and improve its brand image the world over.
Although most of its products are free, Google generates revenue through its
advertising product, Google AdWords. This innovative advertising program delivers
advertisements on websites whose content is relevant to the product. Google uses its
AdSense program as a platform for third party web sites to “lease” some real estate to
Google on their websites to deliver relevant ads.
Company Philosophy
“Never settle for the best”42
Values are driven through the company’s “Ten Things”. Some of the important points
from this list which makes Google successful today is focusing on the user (i.e. deliver
value to the user who comes to your site and not make changes according to
shareholders views). Also, the “10 things” clearly identify what employees need to keep
in mind when working on a product – needs to be fast, delivered wherever the user is,
and provide the best user experience. They also stress on the fact that being greedy is
not an option when designing a product. Another important point to be noted is Google
uses most of its products internally - their internal e-mail system is Gmail, their internal
scheduling system is Google Calendar, etc. This “eats its own dog food” policy not only
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45. conveys the confidence Google has in its own products, but also enables a more
reliable and user friendly product.
Organizational Structure and Controls
Andy Grove, founder of Intel Corp. observed, “From the outside it looks like Google’s
organizational structure is best described by . . . Brownian motion… in an expanding
bottle. Does [Eric Schmidt] think it will work forever?” In his video response, Eric
Schmidt confirms that the description is accurate, but only for its creative workforce.
Google runs its finance, legal, investment, M&A and sales in a traditional way although
its creative side, engineering and R&D, can be described as Brownian motion. As seen
in their organizational chart in Exhibit 18, at the management level, the creative
workforce falls under the President (Products) and President (Technology). As
mentioned earlier, their Engineering and R&D departments do not follow a hierarchical
structure. Managers are more like tech leads who program at least half time. The
company follows agile programming throughout the company, which enables
programmers to move from one department to the other very easily. In most software
companies, corporate structure limits the movement of employees between projects,
resulting in employees being overworked and burnt out, thus reducing productivity,
innovation and morale. Google eliminates this by encouraging employees to move
between projects at any time without any questions asked. This prompts us to ask how
this system makes sure programmers don’t leave trouble projects behind with buggy
code, in short, what controls are used in monitoring appraising employee behavior. This
is where employee rewards / incentives come in. Reward levels are tied to the
importance of a project, so employees working on more important projects are rewarded
better. The environment can be best described as a bunch of start-ups within a
company. Since employees work on any idea that comes to their mind, they are
rewarded when their products turns out to be tremendously impactful.
So what are the rewards? - Financial rewards can be anything from gift certificates and
massage coupons to huge bonuses and stock option grants. Non financial rewards
include recognizing employees responsible for important product launches in quarterly
all-hands meeting by putting up their pictures and receiving applauds from everyone
35